U.S. reciprocity under FATCA to improve? Perhaps the U.S. will join CRS?

On May 5, 2016, Secretary of Treasury Jacob J. Lew wrote to the Honorable Paul D. Ryan (Speaker, US House of Representatives) regarding effective tools for countering tax evasion. Mentioned in this letter, is the Foreign Account Tax Compliance Act (FATCA) that was enacted in 2010 as a critical tool for combating tax evasion. FATCA provides the US Government with previously unprecedented information regarding US taxpayers’ financial accounts abroad. So far, 110 Governments have partnered with the US, and over 200 thousand financial institutions are registered with IRS using its internet portal. The first exchange of financial information took place in September, 2015. The Common Reporting Standard (CRS), an offspring of FATCA, developed by the OECD (Organisation for Economic Co-operation and Development) and endorsed by the G-20 countries, is set to launch its first automatic global exchange in 2017. The US is not a participant in CRS.

Secretary Lew states that the US should to “live up to its end of the bargain on foreign tax reporting”. The US has reciprocal agreements that are called Intergovernmental Agreements (also known as IGA 1) with 110 nations. These nations are the US FATCA partners. Secretary Lew is making this comment because under the IGA 1, Foreign Financial Institutions are providing the US Treasury with “more” information than what the US is providing its FATCA partners. Here is a simplified summary of what is exchanged:

In addition, to not reporting account balance or value, the US does not have a requirement to disclose information with respect to US entities controlled by residents of its FATCA partners. Could this potentially change? Secretary Lew also mentioned in his letter that beneficial ownership legislation needs to be enacted. There is a new approved Customer Due Diligence Rule that requires financial institutions to “collect and verify the personal information of the real people (also known as beneficial owners) who own, control and profit from companies when those companies open accounts”. This legislation requires U.S. companies to report beneficial ownership information at the time of creation, and share it with the US Treasury Department, as well as law enforcement (with the purpose of disrupting illicit financing networks). Banks would have to report individuals who have 25% or more ownership interest in a company, as well as individuals that have responsibility to control or manage the company (also known as the manager). The purpose of all this legislation is to strengthen financial transparency, and fight the misuse of companies through illicit activity.

Because the US is not participating in CRS, it is now contending with a reputation as being the safest and most efficient Tax Haven in the world. The consequences of occurrences like the “Panama Papers”, Geographic Target Orders issued by FinCEN, Beneficial Ownership and Customer Due Diligence Final Rules bring challenges to our financial markets that will change the landscape over time. Thus, the reputation of the US as safe haven will diminish over time.

An important step to repairing the US tax haven reputation is US participation in the CRS. According to the OECD report dated May 9, 2016, there are 101 jurisdictions that have already committed. There is an interesting footnote at the bottom: “The United States has indicated that it is undertaking automatic information exchanges pursuant to FATCA from 2015 and has entered into intergovernmental agreements (IGAs) with other jurisdictions to do so. The Model 1A IGAs entered into by the United States acknowledge the need for the United States to achieve equivalent levels of reciprocal automatic information exchange with partner jurisdictions. They also include a political commitment to pursue the adoption of regulations and to advocate and support relevant legislation to achieve such equivalent levels of reciprocal automatic exchange”.

There is an international expectation for the US to join the CRS members and to be on an equal-footing with respect to global fiscal transparency. That said, company formation in the US is at the individual state level. There are states in the US like Nevada, Wyoming, Delaware and South Dakota that have easy to incorporate procedures with secrecy built in, and no questions asked. Getting state officials to change the laws of incorporation might be more challenging than getting legislation approved by Congress.

By Stanley Foodman for TYT

Stanley Foodman CPA is CEO of Foodman CPAs & Advisors in Miami, Florida and a recognized forensic accountant and litigation support practitioner. Specializing in complex domestic and international tax matters, he has served as an expert witness and forensic accountant for some of the nation’s most challenging, high-profile economic crime cases. He and his team of accountants also assist clients with a full range of accounting matters including compliance, voluntary disclosure, corporate and individual taxation, family law litigation, estate and trust tax and wealth planning. Consistently ranked as one of the top accounting firms in South Florida, Foodman CPAs & Advisors assists clients locally, nationally and internationally.